Tax man to take a bite of tech employees' free meals?

The free meals doled out by Silicon Valley titans such as Facebook and Google may soon carry an additional burden for employees: the US Internal Revenue Service (IRS) is reportedly weighing whether to count them as income for tax purposes.

The agency itself is keeping mum on the topic, but The Wall Street Journalcites tax lawyers familiar with the situation, who claim companies are often forced to settle with the IRS over fringe benefits such as free meals.

"If they're in there auditing, and you're not taxing the meals, they're going to challenge you on it," Thomas Cryan, Jr., a tax attorney in Washington, DC, told the paper. "I have worked on audits for large tech companies in Silicon Valley on this exact issue."

Free chow is one of the favorite perks of tech companies of late, which often struggle to hire and retain skilled employees in today's highly competitive jobs market.

Facebook, Google, Twitter, Yahoo!, and Zynga all offer their employees catered meals, with many employees eating at the office three times a day. Even some Silicon Valley startups offer subsidized lunches via food trucks that arrive outside their premises daily.

The cost of all that grub can add up. Given all of the options available at Google's various on-campus cafes, it wouldn't be unreasonable to put the value of a typical meal at around $10. An employee who eats at the office twice a day could easily gobble up $100 worth of services per week – or around $5,000 per year.

That's no small potatoes, and some experts believe it's money that should be counted among employees' compensation, along with their base salaries and the cost of such benefits as health insurance.

"I buy my lunch with after-tax dollars. And I have to pay taxes to support free meals for those Google employees," Martin McMahon, Jr., a tax-law professor at the University of Florida, told the Journal, adding that he believed the free meals should be considered taxable income.

This is not a new issue. Although the concept of tech companies offering their employees gourmet catered dining is relatively recent, restaurants, hotels, bars, and other hospitality businesses have offered their staffs free meals since time immemorial.

In those cases, the US federal tax code allows a business to exclude the cost of meals from its employees' income only as long as the meals are eaten on the employer's business premises and they are provided "for the employer's convenience."

A company like Google might have a hard time proving the latter clause. A recent job posting for a "Food Experience Design Manager" would seem to suggest that mealtimes at the Chocolate Factory's over 120 cafes are designed as much for its employees' enjoyment as to bolster the bottom line:

As the Global Service and Experience Design Manager, you think about everything that goes into how Googlers interact with food. From our ever-popular micro-kitchens to multi-course meals at cafes, the design, layout and experience of eating at Google should promote healthy habits and social serendipity for Googlers. Our food venues need to support the healthiest, happiest workforce on the planet.

Similarly, Yahoo! started offering its employees free food last August, with a spokesperson tellingEl Reg that the move was "part of how Yahoo! looks after its talent." But meals offered as a recruitment or retention tactic don't count as being "for the employer's convenience" either, according to experts.

Quite understandably, none of the companies mentioned by the WSJ were willing to comment on their compliance with the tax codes, offering only that they believed their practices were in keeping with the law.

The IRS handles all such matters on a case-by-case basis, and it declined to discuss whether it was investigating any particular companies.

But with the April 15 deadline for individual income tax returns fast approaching, tax officials will be keeping a keen eye on highly compensated tech professionals and the employers for whom they work. Where free meals are concerned, it will be no surprise if before long, the IRS decides it wants a piece of that pie. ®